The US Dollar Meltdown Validates Our Version Of The September Syndrome!

``A good trader has to have three things: a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility.” -Michael H. Steinhardt, American investor and philanthropist

The September “syndrome” struck again!

But this time it hadn’t been what the mainstream had expected. Instead, it had been what we had been expecting.

Coming into September we pounded on the table that 2009 won’t be 2008; where US banking system went apoplectic from which the world endured a consequent “sudden stop” and where global economic activities went into a freeze-frame or a virtual standstill-our Posttraumatic Stress Disorder (PTSD).

2009 will most likely produce a different seasonal pattern, we asserted.

It would probably center on the US dollar’s weakness and gold’s strength which should also provide support to stock markets especially in Asia and Emerging Markets, as we suggested in The US Dollar Index’s Seasonality As Barometer For Stocks, Gold As Our Seasonal Barometer, Gold As Our Seasonal Barometer (For Stocks) II and Gold and the September Stock Market Seasonality Syndrome.

Well, all these have been captured in Figure 1.

Figure 1: A US Dollar Meltdown Equals Rising Gold And Stock Markets

The US dollar Index’s meltdown has had a mirror or inverse effect on Gold (surged to close at record highs), global stock markets (DJW) and Emerging Market stocks (EEM).

So far this has only shown how the mainstream had been looking at the wrong angle and had been very much fixated with traditional metrics but has significantly been caught disoriented by overlooking the genuine dynamics of the market.

Worst, they have relied on cognitive biases, such as the hindsight bias (rear view mirror syndrome), the focusing effect and anchoring, as foundations for their analysis.

For instance, deflation advocates have used China’s recent crash as evidence to advance their cause (a case of selective perception).

However we averred that the directions of the US dollar will likely determine the degree of the correction in China’s Shanghai index (SSEC), as we wrote in Will China’s Stock Market Correction Spread Globally?, ``if the US dollar fails to rally while global stocks weaken, then any correction, thus, will likely be mild and short.”

The Shanghai Index has advanced by 4.5% this week and will most likely follow the path of Russia’s RTSI, see figure 2.

Figure 2: Bulls Recapture Russia RTSI, Shanghai To Follow

Earlier Russia’s RTSI had corrected by 30% but has now entirely reclaimed the losses.

With a bullish reverse head and shoulder (chart) pattern along with a sustained feebleness in the US dollar, the likelihood is that the RTSI will make a significant breakthrough soon (if not by next week).

Moreover, many have called for a major correction due emerging markets attributing overvaluation levels.

For example this news from Bloomberg underscores on such extravagance, ``Developing-nation stocks rose, driving the MSCI Emerging Markets Index to its most expensive level in nine years, as Indian software makers rallied and higher oil prices boosted the revenue potential of economies sustained by exports.

``The MSCI Emerging Markets Index increased 0.8 percent to 887.05 at 5:01 p.m. in New York, pushing valuations to 20 times reported earnings for the first time since June 29, 2000, according to data compiled by Bloomberg”

While we basically agree with the concept that “markets have risen too fast and too soon”, that would be interpreted as looking at the markets from the lens of the mainstream.

Again, excessive dependence on conventional metrics will likely persist to befuddle mainstream analysis.

In addition, they seem to forget that in major trends, whether in bullmarkets or in bearmarkets, momentum can lead to trend overextensions.

Of course the principal error has been that the mainstream has all underestimated the impact of government printing press on the financial and economic sphere.

Governments Will Opt For The Inflation Route

``Many false arguments are used to defend inflationism. Least harmful is the claim that a moderate inflation does not do much harm. This has to be admitted. A small dose of poison is less pernicious than a large one. But this is no justification for administering the poison in the first place. It is claimed that in times of a grave emergency the use of means may be justified which in normal times would not be considered. But who is to decide whether the emergency is grave enough to warrant the application of dangerous measures? Every government and every political party in power is inclined to regard the difficulties it has to cope with as quite extraordinary and to conclude that any means for combatting them is justified. The drug addict, who says he will abstain from tomorrow on, will never conquer the drug habit. We have to adopt a sound policy today, not tomorrow.”-Ludwig von Mises, Interventionism: An Economic Analysis, Inflation and Credit Expansion

It’s pretty naïve for any expert to suggest that governments won’t be inflating away their liabilities. That’s principally a function of “Post hoc ergo propter hoc” (after this, because of this) fallacy. That’s also because they have retrofitted on their selected facts to their argument which leads to their preferred conclusion-deflation.

First, such argument betrays the incontrovertible avalanche of evidences from the current actions of policymakers.

And most importantly, the primary sin of such flawed argument is that it basically ignores the political nature of governments and its inflationary tendencies.

For instance, the US Federal Reserve continues to expand its balance sheet this week. According to the Wall Street Journal Blog, ``The Fed’s balance sheet expanded again in the latest week, rising to $2.072 trillion from $2.069 trillion, but the expansion highlighted the recent shift in the makeup. The increase came solely from purchases of mortgage backed securities, Treasurys and agency debt.”

Figure 3: T2 Partners: Why There Is More Pain To Come

Possible reasons for these current actions by the US Federal Reserve:

One, the US Federal Reserve could be positioning against expected losses arising from forthcoming mortgage resets from Alt-A and prime mortgages (see figure 3) as well as potential bank losses from the struggling commercial real estate mortgages.

And second, the US Federal Reserve could be providing “liquidity” (euphemism for inflating the system) in anticipation of the seasonal weakness for the stock market.

Or most likely it could be a combination of both factors.

Policy Support For Stock Markets

While the Fed Chairman Ben Bernanke doesn’t explicitly declare that Federal Reserve policies are meant to directly/indirectly support the US stock market to paint the impression of recovery, we must be reminded that Mr. Bernanke sees the stock market as playing a very crucial role in the macro economy which, for him, deserves support.

As he wrote in 2000, A Crash Course for Central Bankers, ``History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.” (bold highlight mine)

So ignoring the policy biases, if not the underlying ideology which undergirds such biases, of the incumbent authorities would seem like a major misdiagnosis.

Mr. Tyler Durden of Zero Hedge provides us with very convincing evidence (see figure 4)

Figure 4: Zero Hedge: Correlation Of S&P 500 Performance With Fed Monetization Activities Since Start Of QE

Notes Mr. Durden (bold highlights mine), ``since the launch of the Fed's Quantitative Easing, aka Monetization, program, the value of the Total Securities Held Outright on the Fed's Balance Sheet has increased by $917 billion- from $584 billion to $1.5 trillion. This has been accompanied by an almost linear increase in the S&P 500 Index, from 721 at QE announcement on March 18 to 1033 yesterday. This $917 billion in extra liquidity, instead of igniting an inflationary spark, as the QE program was designed to do, is now (metaphorically) sloshing around bank basements.

``As a reminder: the most recent reading of Total Deposit Reserves was... $886 billion dollars: An almost dollar for dollar match with the increase in Securities Held Outright of $917 billion. And instead of this excess money hitting broader aggregates such as M2 or MZM, it is held by the banks, who proceed to buy securities outright on their own, either Treasuries or Equities. Apply the proper "money multiplier" to get the monetary impact on the S&P 500, as a result of the banks not lending these excess reserves, and instead simply speculating with it, and you will likely get the increase in the market cap of the S&P since the launch of QE.”

So like in China, where the explosion of bank lending have seeped through the real estate markets and stock markets, it is likely that the extra reserves provided for by the Federal Reserve to its banking system has equally powered the US stock market to its present levels.

As you may observe, the political decision making process (choosing to support one industry over another) is vastly intertwined or deeply entrenched with the performance of asset pricing dynamics.

Political Nature of Inflation

Will the US refrain from inflating away its system?

Harvard’s Professor Kenneth Rogoff gives as a clue, `` Government backstops work because taxpayers have deep pockets, but no pocket is bottomless. And when governments, particularly large ones, get into trouble, there is no backstop. With government debt levels around the world reaching heights usually seen only after wars, it is obvious that the current strategy is not sustainable…

``We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the U.S., for example, significantly inflated down its debt in the 1970s, and debased the gold value of the dollar from $20 per ounce to $34 in the 1930s.”

So the US is faced with two choices, either inflate or default.

Yet the most attractive choice for the current crop of policymakers would likely be the inflation route.

Aside from economic ideology, the immediate triumphalism from present policies as manifested in the market actions will unlikely prompt for ‘policy exit’ soon. Why stop the party when everything has gone groovy?

The party has to go on, even if policymakers today chatter on “exit strategies”.

This has been general the theme from the officialdom seen from Canada’s Prime Minister Stephen Harper, China’s Premier Wen Jiabao, Governor Mervyn King of the Bank of England, Subir Gokarn, a candidate for the for the deputy governor’s post at the Reserve Bank of India, European Central Bank President Jean-Claude Trichet, and US Federal Reserve Vice Chairman Donald Kohn.

Yet it would take humongous amount of money (or debt/credit) to sustain the present system.

Mr. Doug Noland of the Credit Bubble Bulletin estimates that $2-2.5 trillion of new or fresh credit is required to support the financial system.

And with markets dependent on government backstop, the only principal source of credit creation would likely emanate from the US government.

Mr. Noland writes (bold emphasis added), ``In this post-Wall Street Bubble environment, only government and government-related Credit retains sufficient “moneyness” in the marketplace. Systemic reflation today depends on a massive inflation of this government helicopter “money.”…

``As I have stressed repeatedly, in the neighborhood of $2.5 TN of non-financial Credit growth is required to stem systemic implosion – a massive Credit expansion with only our federal government up to the challenge. It is this fundamental facet of Bubble economies – a maladjusted economic structure sustained only through ongoing Credit excess – that prohibits Washington from extricating itself from very public “private sector” intrusions. Fixated on the notion of sustainable recovery, policymakers will not be Dialing Back from massive borrowing, spending, or market backstopping endeavors. And this gets to the core of the unquantifiable costs of failing to rein in Credit and asset Bubbles during the boom.”

For global governments (especially for those havocked by the bubble) working to extend their presence over the marketplace reveals of the operating political nature of the inflation process. The G-20s recent move to “strengthen financial regulation” is an example of such manifestation.

The more the government intervention becomes entrenched into the system or the marketplace, the greater their perceived need for inflation.

As Professor Thorsten Polleit explains (bold highlights mine), ``Under a regime of government-controlled money, it is a political decision whether or not the money stock changes — that is, whether there will be ongoing inflation (a rise in the money stock) or deflation (a decline in the money stock).

``Governments have a marked preference for increasing the money stock. It is a tool of government aggrandizement. Inflation allows the state to finance its own income, public deficits, and elections, encouraging a growing number of people to coalesce with state power.

``A government holding a monopoly over the money supply has, de facto, unlimited power to change the money stock in any direction and at any time that is deemed politically desirable.”

Hence, where the marketplace operates under the iron visible hands of governments, the understanding of the role and the incentives driving governments’ policymaking is pivotal to the analysis of asset pricing dynamics.

Ponzi Financing Requires The Intensive Use Of The Printing Press

Nonetheless it would probably take increasingly more than $2.5 trillion of credit to sustain the present system going forward, as the marketplace has been operating under Ponzi financing dynamics.

Policymakers appear to be in admission that the current conditions of the global economy seem operating under the backdrop of rising asset prices instead of a vigorous economic recovery, hence their alleged aversion to withdraw stimulus programs presently in place.

This phase is otherwise known as Ponzi financing.

The credit cycle as defined by Hyman Minsky constitutes 3 stages: Hedge financing, Speculative financing and Ponzi Financing.

As we described in September 2008 article, Global Markets: From “Minksy Moment” To The “Mises Moment”, ``Minsky’s model actually basically depicts of the credit cycle underpinning the business cycle, where credit transforms from a function of HEDGE financing (ability to pay principal and interest) to SPECULATIVE financing (ability to pay interest only, which needs a liquid market to enable refinancing and debt rollovers) and finally to PONZI Financing (basic operations cannot service both interest and principal and strictly relies on rising asset prices to service outstanding liabilities).”

In other words, the key to sustaining the credit cycle of Ponzi financing means sustained elevation of asset prices. It commands the feedback loop mechanism of collateral values and lending activities.

To quote George Soros, ``When people are eager to borrow and the banks are eager to lend, the value of the collateral rises in self-reinforcing manner and vice versa. Thus the act of lending activates a reflexive relationship.”

And that means a pyramiding scale of credit growth in order to maintain the momentum or trend of rising prices.

Yet this serves as another characteristic of the inflation process.

As Professor Hans F. Sennholz wrote (bold emphasis mine), ``But as certain as there must be a readjustment, just as determined are our planners to stave off the day of reckoning. And it is true that this can be done — temporarily. The consequences of policies of inflation and credit expansion, as far as the trade cycle is concerned, can temporarily be postponed through an intensification and acceleration of the depreciation process.

``That is to say, our monetary planners can temporarily avert the inevitable decline and readjustment through an intensified operation of the printing presses. As all political parties are dead set against any economic readjustment, they are all ready and determined to resort to this tasty but tragic medicine in case the boom economy should taper off during their tenure of office.”

Thus, the printing press will continue to be the key towards asset pricing dynamics.

Essentially, deeply embedded mainstream economic ideology, policy biases, the political nature of governments, the incentive (political benefits) of governments to inflate, privileges (minimal costs) from seignorage and the preference for credit driven economic growth or Ponzi financing are the principal factors that would influence governments to favor inflation as a means of addressing over-indebtedness.

As we concluded in The US Dollar Index’s Seasonality As Barometer For Stocks, ``Bottom line: Inflation is a political process. It would be difficult, if not suicidal, to take a contradictory stand against US authorities, when we recognize that the policy thrust has been to use the technology known as the printing press, to achieve a substantially reduced purchasing power for the US dollar.”

It wouldn’t be prudent to resist, oppose or contradict the general market trend and or of governments adamantly pursuing the inflation route.

That would be tantamount to standing in front of a speeding truck.

Velocity Of Money: A Flawed Model

``Economics is a social science. Econometric models spit out results that lack the accuracy of chemistry experiments and the precision of mathematical equations. Central bankers are forced to deal in the realm of the touchy-feely all the time. If their work could be reduced to an equation, we wouldn’t a) need them or b) find ourselves in the mess we’re in now.” Caroline Baum Central Banks Can Do Better Than Just Mopping Up

Zero Hedge’s Mr. Tyler Durden comment of ``And instead of this excess money hitting broader aggregates such as M2 or MZM, it is held by the banks, who proceed to buy securities outright on their own, either Treasuries or Equities. Apply the proper "money multiplier" to get the monetary impact on the S&P 500, as a result of the banks not lending these excess reserves, and instead simply speculating with it, and you will likely get the increase in the market cap of the S&P since the launch of QE” provoked my inquisition to mainstream’s allure to use money velocity as benchmark for arguing the case for deflation.

Velocity of money is the turnover (circulation) rate of money in terms of transactions.

It is assumed that a low money velocity, which means lower rate of circulation, can only support lower prices.

Yet if US banks have indeed been directly speculating, and if such activities haven’t been registering in money aggregates, as postulated by Mr. Durden, then the whole premise built around the inefficacy of monetary policies seems tenuous because statistics have not accurately captured such bank speculations in the asset markets.

Besides, Velocity of Money is a statistical measure based on the Keynesian consumption model, where spending equates to income.

The idea is more spending would result to higher prices and higher national income and or higher economic growth.

This is an example from wikipedia.org,

``If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year

Mechanic buys $40 of corn from farmer.

Farmer spends $50 on tractor repair from mechanic.

Mechanic spends $10 on barn cats from farmer

``then $100 changed hands in course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent an average of twice a year, which is to say that the velocity was 2 / yr.”

In short, velocity of money measures transactions only and not of real economic output.

Moreover, it is also implies that money printing or increasing systemic leverage as the key driver to an increased velocity of money.

From the Austrian economic perspective, this concept is pure flimflam.

Henry Hazlitt wrote ``What the mathematical quantity theorists seem to forget is that money is not exchanged against a vacuum, nor against other money (except in bank clearings and foreign exchange), but against goods. Hence the velocity of circulation of money is, so to speak, merely the velocity of circulation of goods and services looked at from the other side. If the volume of trade increases, the velocity of circulation of money, other things being equal, must increase, and vice versa.” (bold emphasis mine)

Similarly Ludwig von Mises scoffs at the concept, ``They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics.” (bold emphasis mine)

Figure 5: Hoisington Management: Velocity of Money

Some deflation exponents say that the two major forces, which drove up the velocity of money, which has characterized the previous boom (see figure 5), particularly financial innovation and leveraging, will be materially less a factor in the post boom era.

The general notion is that the collapse of the shadow banking system and the deleveraging in the US households and its banking system would lead to deflationary pressures from which the government or the central bank inflationary policies won’t be able to offset.

That is from a mathematical standpoint, from which presumes to capture all the variables of human actions. Unfortunately, these macro based math models don’t reflect on reality, because it can’t impute the cause and effect, before and after outcomes of human decisions.

Other reasons why I think velocity of money is a flawed model?

One, such outlook depends on the accuracy of each and every variable that constitutes the equation, such as money supply. If Mr. Durden is correct, then velocity of money model automatically crumbles.

Two, it disregards the impact of pricing dynamics on the marketplace, e.g. how will lower prices impact demand?

Three, it discounts man’s adoptability in acquiring technology [see earlier post, Technology's Early Adoptor Disproves Deflation]

Fourth, such measure focuses entirely on the leveraging of the financial sector and leaves out the contributions from the real economy.

Fifth, it treats the economy as a homogeneous constant (single form of capital, labor and output), from which excludes the evolving phases of the interlinkages of the marketplace, governments and technology.

Lastly, it oversimplistically omits the transmission mechanism from the interactions of the US (policies and economic activities) with the world.

As Professor Arnold Kling observed, ``Structural models do not extract information from data. Instead, they are a method for creating and calibrating simulation models that embody the beliefs of the macroeconomist about how the economy works. Unless one shares those beliefs to begin with, there is no reason for any other economist to take seriously the results that are calculated.” (bold emphasis mine)

Or as Warren Buffett on warned on depending on models, ``Our advice: Beware of geeks bearing formulas.”

Jim Rogers: 10 Tips For A Successful Life

In his newest book, the legendary investor Jim Rogers shares his wisdom as legacy to his daughters and to the public.

From LewRockwell.com:

``A Gift to My Children: A Father's Lessons for Life and Investing (Random House, 85 pages, $16) is Jim Rogers' love letter to his daughters, Happy and Baby Bee. Reminiscent of The Autobiography of Benjamin Franklin, which was also written by a father to his child, Rogers' book is full of no-nonsense, unsentimental fatherly advice.

``This charming volume captures a father's voice – loving, direct, and sometimes stern – and amplifies his message for all to hear.

``Among Jim Rogers' best advice:

1. Conduct your own research and trust your own judgment.

2. Focus on what you yourself love.

3. Be persistent.

4. Broaden your horizons and see as much of the world as you can.

5. The most important thing you can learn is how to think and question everything you hear.

6. Study and learn from history.

7. Master more than one language – and make sure one of them is Mandarin.

8. Don't panic.

9. Take care of yourself and don't neglect the sunscreen.

10. Remember that boys need girls more than girls need boys.

OECD on Global Economy: Broad Recovery Ahead

The OECD says that the global economy is not only on a mend, but is likely transitioning into an expansionary phase.

From the OECD press (bold emphasis added)

``OECD composite leading indicators (CLIs) for July 2009 show stronger signs of recovery in most of the OECD economies. Clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia. The signs from Brazil, where a trough is emerging, are also more encouraging than in last month’s assessment.




For us, this phase accounts for as the "benign side or sweet spot" of inflation.

To quote Hans Sennholz, ``The subtle instruments of inflation and credit expansion first lead to the "prosperity" side of the trade cycle."

Making Progress In Global Child Mortality

The good news is that more lives are being saved.

According to the Economist, (bold emphasis mine)

``MORE children are surviving beyond their fifth birthday, according to a new report from the United Nations Children's Fund (Unicef). The child mortality rate—the number of under-fives dying per thousand live births—declined from 90 in 1990 to 65 in 2008, a drop of over a quarter. The number of deaths has fallen from 12.5m in 1990 to 8.8m last year, the lowest since records began in 1960. The biggest improvements are in Latin America and the former Soviet Union, where mortality rates have fallen by more than half. Progress in sub-Saharan Africa, which now accounts for half of all deaths, has been slower, but Niger, Malawi, Mozambique and Ethiopia have seen reductions of more than 100 per 1,000 livebirths since 1990. The report notes that despite big improvements in preventing malaria, one of the three main causes of deaths, much more needs to be done to treat the other two causes, pneumonia and diarrhoea."

A longer timeline chart from the New York Times below highlights on the secular trend of child mortality rate improvement...




The New York Times, (bold emphasis mine)

``The child mortality rate has declined by more than a quarter in the last two decades — to 65 per 1,000 live births last year from 90 in 1990 — in large part because of the widening distribution of relatively inexpensive technologies, like measles vaccines and anti-malaria mosquito nets.

``Other simple practices have helped, public health experts say, including a rise in breast-feeding alone for the first six months of life, which protects children from diarrhea caused by dirty water.

``Wealthy nations, international agencies and philanthropists like Bill and Melinda Gates have committed billions of dollars to the effort. Schoolchildren and church groups have also pitched in, paying for mosquito nets and feeding programs.

``Taken together, they have helped cut the number of children under 5 who died last year to 8.8 million — the lowest since records were first kept in 1960, Unicef said — from 12.5 million in 1990.

From Rotary International

Overall, globalization, greater informational flows and increased community based approaches have led to such tremendous gains.

Cartoon of the Day: Government Can Fix...., BUT...!

The self-contradictions of US President Obama's Policies in a lampoon...

Great stuff from Michael Ramirez [HT: Mark Perry]

The Myths of Deregulation and Lack of Regulation As Causal Factors To The Financial Crisis

Professor Arnold Kling, former economist on the staff of the board of governors of the Federal Reserve System and also a former senior economist at Freddie Mac and presently a co-host of the popular EconoLog has an eloquent and impressive article refuting the popular myths peddled by liberal-progressives at the American.com, entitled Regulation and the Financial Crisis: Myths and Realities

His intro: (italics mine)

``The role of regulatory policy in the financial crisis is sometimes presented in simplistic and misleading ways. This essay will address the following myths and misconceptions

Myth 1: Banking regulators were in the dark as new financial instruments reshaped the financial industry.

Myth 2: Deregulation allowed the market to adopt risky practices, such as using agency ratings of mortgage securities.

Myth 3: Policy makers relied too much on market discipline to regulate financial risk taking

Myth 4: The financial crisis was primarily a short-term panic.

Myth 5: The only way to prevent this crisis would have been to have more vigorous regulation.

``The rest of this essay spells out these misconceptions. In each case, there is a contrast between the myth and reality."

In short, such misplaced arguments attempt to deflect on the culpability of the role of policymakers and their interventionists policies in shaping the financial crisis and instead pin the blame on "market failure" as justification for more government intervention.

Read the rest here

Professor Kling's conclusion:

``The biggest myth is that regulation is a one-dimensional problem, in which the choice is either “more” or “less.” From this myth, the only reasonable inference following the financial crisis is that we need to move the dial from “less” to “more.”

``The reality is that financial regulation is a complex problem. Indeed, many regulatory policies were major contributors to the crisis. To proceed ahead without examining or questioning past policies, particularly in the areas of housing and bank capital regulation, would preclude learning the lessons of history."

Yes, oversimplification of highly complex problems can lead to more prospective troubles than function as preventive or cure to the disease, especially when myopic prescriptions ignore the human behavior dynamics in the face of regulatory circumstances.

As David Altig, senior vice president and research director at the Atlanta Fed wrote in Markets work, even when they don’t, ``Markets are, everywhere and always, one step (or more) ahead of regulators"

Doing Business In The Philippines

In an earlier post, we featured why the Philippines severely lags the global competitive environment, see 2009 Global Competitiveness Report And The Philippines.

In this post, the World Bank provides the details why the economy hasn't been materially improving. Yes, some (marginal) improvements, but not sizeable enough to make a dent on the real economy.

It's primarily because policies have been less friendly (my adjective-averse/hostile) to business.

Here is the partial list of the world ranking according to doingbusiness.org.


Notice that the Philippines has ranked 144th out of 183 countries. Last year we ranked 141st.

Yet notice that the same countries, which are in the highly competitive order, have a pro-market economy environment.

We'd like to avoid saying pro-business as it may create a misplaced notion of supporting "big" business.

A market economy is an economy conducive to competitive entrepreneurial class, particularly small and medium scale enterprises.

In the East Asia & Pacific, the Philippines has been placed dismally in 21st out of the 24 countries. According to the doing business ratings, we lag almost across all categories- the worst being-starting a business, paying taxes, applying for permits and employing workers. Our best has been trading across borders.

Generally we have been relegated to lowest order just in front of Cambodia, Timor-Leste and Laos.

A better graphic from Doing Business Philippines

The Philippines' overall ranking fell, this year, not because of more deterioration but because more countries have aggressively worked to improve on their business environment. As the above graph would show.

Recently the Philippines reportedly adopted reform measures aimed at ameliorated the business environment:

``The Philippines enhanced access to credit with a new credit information act that regulates the operations and services of a credit information system.

``The government also cut the corporate income tax rate from 35 percent to 30 percent and promoted company reorganization procedures by introducing prepackaged reorganizations and regulating the receiver profession."

Unfortunately while necessary and quite laudable, it hasn't been sufficient.

The Philippines remains structurally trammeled by anti-business (anti competition) pro-government (politics) policies, laws and regulations.

Unfortunately, populism and personality based politics won't solve this.

Gender Inequality In Post Graduate Earnings

Interesting observation from the Economist on post graduate earnings comparison between genders.


According to the Economist (bold highlights mine),

``UNIVERSITY offers more than the chance to indulge in a few years of debauchery. A new report from the OECD, a rich country think-tank, attempts to measure how much more graduates can expect to earn compared with those who seek jobs without having a degree. In America the lifetime gross earnings of male graduates are, on average, nearly $370,000 higher than those of non-graduates, comfortably repaying the pricey investment in a university education (female graduates earn an extra $229,000). In South Korea and Spain female graduates pull in a lot more than their male counterparts. In Turkey, although the additional wages are more modest, the difference between men and women is far less pronounced."

OECD in a press release makes additional notes where male ROI (on earning/learning) have been higher in most instances... (emphasis added) [note I haven't accessed the complete report]

``The average net public return across OECD countries from providing a male student with a university education, after factoring in all the direct and indirect costs, is almost USD 52,000, nearly twice the average amount of money originally invested.

``For female students, the average net public return is lower because of their lower subsequent earnings. But overall the figures provide a powerful incentive to expand higher education in most countries through both public and private financing...

I would comment that much of this outlook is more a function of the financial perspective and omits social aspects (role of maternal or child bearing women on lower wages) based on the press release.

The OECD adds, (again all emphasis mine)

``Among other points, the 2009 edition of Education at a Glance reveals that:

``The number of people with university degrees or other tertiary qualifications has risen on average in OECD countries by 4.5% each year between 1998 and 2006. In Ireland, Poland, Portugal, Spain, and Turkey, the increase has been 7% per year or more

``In 2007, one in three people in OECD countries aged between 25 and 34 had a tertiary level qualification. In Canada, Japan and Korea, the ratio was one in two.

``In most countries, the number of people who leave school at the minimum leaving age is falling, but in Germany, Japan, Mexico, Poland, Turkey and the United States their numbers continue to rise.

``Early childhood education is growing fast, and nowhere more than in Sweden. On average in OECD countries, enrolments have risen from 40% of 3-4 year-olds in 1998 to 71% in 2007; and in Turkey, Mexico, Korea, Poland, Sweden, Switzerland and Germany enrolment in early childhood education more than doubled.

``Young people who leave school at the minimum leaving age without a job are likely to spend a long time out of work. In most countries over half of low-qualified unemployed 25-34 year-olds are long-term unemployed.

``People who complete a high-school education tend to enjoy better health than those who quit at the minimum leaving age. And people with university degrees are more interested in politics and more trusting of other people."

Well, the OECD seem to omit the impact of minimum wages in the role of unskilled and school drop-out unemployment figures.

The outlook appears skewed towards promoting government spending in education.

2009 Global Competitiveness Report And The Philippines

Here is the World Economic Forum's Global Competitiveness Report for 2009-2010

The top 25 ranking based on the interactive chart...
The report has the Switzerland dislodging the US for the top spot while Asia's Singapore has captured the 3rd spot.

Notice that 7 out of the top 20 most competitive countries are from Asia, particularly Singapore (3), Japan (8), Hong Kong (11), Taiwan (12), Australia (15), Korea (19) and New Zealand (20).
And the same Asian countries improved on their year on year rankings while most of the OECD economies has declined. (Hat Tip: News N Economics)

In other words, it can be deemed that Asia has used the crisis as an opportunity to lever up the competitive scales.


Unfortunately, for the Philippines, we still rank a dismal 87th, way below our ASEAN Neighbors.
Areas where we are systemically weak (red ellipses):

1) markets (goods, labor and financial/capital markets)
2) institutions
3) infrastructure
4) innovation

And the probable causes influencing such vulnerabilities...
Let me add that institutional and market weakness are interrelated. Yet innovation is mostly a byproduct of the market forces seeking to please consumers.

Institution/s captured by political related (rent seeking) forces won't likely be open to market reforms or development.

In addition, corruption is a symptom of big government, bureaucratic inefficiencies, political influences, instability of policies and unenforceable or selective implementation of regulations.

Whereas infrastructure weakness can always be resolved by economic openness or secondarily, government spending (not my choice)

Hence, the idea of virtuous leadership won't help unless it adopts more economic freedom and simultaneously act to tether on such dominant structural political forces that forestalls much needed market reforms, that leads to innovation and institutional stability.

Technology's Early Adoptor Disproves Deflation

I'd like to rephrase the theme of Jessica Hagy's Shiny Object! Must Get! graphic in economic context: technology assimilation refutes the deflation bugbear in the absolute sense.

How?

This wonderful quote from Bloomberg's Matthew Lynn (Deflation Theory Is Lemon We Have All Been Sold), [bold emphasis mine]

``Everyone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well."

Moral: Prices are valued subjectively and relatively.

John Stossel: The Green Jobs Fallacy

John Stossel explains Frederic Bastiats's Broken Window Fallacy applied by governments to create so called "Green Jobs".

(HT: Heritage Blog)

INO.com's Adam Hewison: Stampede Into Gold...This Could Be The Real Thing!

INO.com's Adam Hewison deals with the possibility of a very exciting move in gold, where there could be a "stampede into gold out of some other assets" by the weekend.

He also says gold's move "could be the real thing".

Pls click on the image for the updated technical developments

Disclosure: this blog is a member of INO's affiliate partner program